Business Today

Corporate Ethical Responsibility

Prof. M.S. Sriram        Print Edition: Jan 6, 2013

Every crisis has lessons and these lessons if learnt, can lead to a better state of affairs. Amidst all the criticism of the relationship between corporates and the government , amidst the accusations of policy paralysis, some aspects stand out, pointing to ways in which a responsible government can act. While failure of public sector corporations is always handled with a bailout, private sector corporations are usually allowed to die unless such cases can cause a larger systemic risk.

Prof. M.S. Sriram
Prof. M.S. Sriram
The only sector that has got the benefit of a benevolent administration across the world is the financial sector, because the collateral damage of a big bank failing is too difficult to contain. In India, we have managed bank failures fairly well, be it Global Trust Bank or the urban co-operative banks in the wake of the Ketan Parekh scam.

The fraud at Satyam presented an interesting challenge. It was not in the financial sector. It was not a public sector organisation. It was not collapsing for business reasons. It was in trouble because of cheating - clearly not a reason for the government to step in.

However, as a brand, Satyam was big. It was one of the four big players in the information technology space and represented Brand India in many ways. If it had failed - given its international client base - there would have been significant collateral damage on the other players, apart from a large-scale lay-off resulting in a glut in the labour market.

This would have made the entire IT sector vulnerable when the global meltdown was happening. Lehman Brothers had declared bankruptcy and Merrill Lynch had merged with Bank of America before Ramalinga Raju confessed, and the ripples of the meltdown were hitting global markets. The government stood tall not only in how it handled the crisis in the financial sector, but also the fraud at Satyam.

Livelihoods of the workforce were at stake and they were saved. The brand equity of the Indian IT sector was more or less kept intact. There was no outflow from the exchequer - no good money chasing bad. The interim board appointed by the government had people known for their integrity.

The intrusion was brief and appropriate. Satyam was handed over to a buyer in a transparent bid and a smooth transition ensued. This is indeed the example of hope amidst the ruins that Satyam was in, and the unimaginable state that the Indian IT sector would have been, but for the intervention.

Did it change corporate governance norms and shake up corporate India? That verdict is difficult to deliver. We have to remember that corporate governance norms have undergone significant changes following the reports of the Kumar Mangalam Birla Committee as well as the N.R. Narayana Murthy Committee. Listing norms are more stringent, the requirement of transparency is heightened and the returns filed by corporates are available on the Ministry of Corporate Affairs website for independent scrutiny. This had happened irrespective of the Satyam fraud. We had the letter of the norm in place.

Cut back to Satyam and look at its board. It appeared to have followed each of the tenets of corporate governance in letter, and won the Golden Peacock Awards for corporate governance multiple times. However, what Satyam taught us is that the governance role in corporates goes much beyond being ornamental.

It sent a strong message that boards had to stand up and be counted. My own experience has been that more people are insisting that their views (and sometimes dissent) be recorded. There is greater probing and a heightened sense of responsibility. Satyam and the Union Carbide verdict, which indicted even the nonexecutive Chairman, have made board members conscious of the negative consequences of being a board member should something go wrong.

Satyam has helped put the spirit of corporate governance into the letter. The fine balance between the mechanism for greater involvement of the board members in governance and the transgression of that role into operational interference has to be maintained. While it is important for independent directors to meet, even seek inputs and interact with the management independently, without whole-time directors, an appropriate framework must be worked out to provide the board access to information.

A significant positive that emerges from the Satyam episode is the redefinition of the audit function and the importance of the signature being affixed by the partner of an audit firm. Marquee audit firms have turned fragile in crisis cases, whether it was Enron, Worldcom, Global Trust Bank or Satyam. Now, there is a demand for rotation of auditors ensuring that they do not get into bed with corporate managements.

This makes the audit committees more vigilant. Accounting information is complex, comes in consolidated form and takes time to study and digest. The audit committee has little time to access the information. There is a golden mean between the time given for the audit committee to study the accounts and the risk of keeping "market sensitive" information for too long with too many people.

However, it may be a good idea to expand the band to allow the committee to apply its mind. The Rajat Gupta sentencing might make independent directors conscious of even inadvertent slippage of sensitive information.

The hope is that the government will be more consistent in how it handles corporate crises. And that the private sector will evolve better processes.
 
The author is a Visiting Professor at the Centre for Public Policy, IIM-Bangalore

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